The federal government is trying to increase lender and consumer participation in a program that has allowed people like Neacy Parks on Chicago’s Northwest Side and the Adamski family in Oak Park to purchase their first homes.
The product the two buyers relied on is the Federal Housing Administration’s 203(K) Loan Program. Created 31 years ago, it’s not exactly a new idea. But with almost 2 million foreclosed homes nationally, many of them empty and needing major repair, the government is trying to encourage more lenders to offer it.
A 203(k) lets an eligible owner-occupant borrow, in one loan and with a 3.5 percent down payment, the funds to both purchase and renovate a home using credentialed contractors. Work can range from cosmetic improvements like new wood floors and new appliances to major projects like adding a room or replacing all the plumbing. The loans also can be used by existing homeowners who want to refinance and rehab their properties.
After a four-year decline from 2002 through 2006, the number of 203(k) loans is on the rise again. In fiscal 2008, the government insured more than 6,700 loans, almost double the 2007 level. So far in its fiscal 2009, more than 11,000 loans have been insured, according to data released last week by the Office of the Comptroller of the Currency.
Still, real estate agents and lenders say more outreach is needed to make the program an effective tool against the rising number of badly decayed foreclosures on the market. A year ago, customers were buying foreclosures that only needed cosmetic work but many of the foreclosures now for sale require substantial rehab, and that can scare off potential buyers who don’t know about the 203(k) loan’s existence, said Winnie Uluocha, a mortgage planner at American Street Mortgage in Chicago.
Veronica Smith, an agent at Alliance Associates Realtors in Broadview, puts it another way. “Distressed properties are everywhere right now,” she said. “If the federal government doesn’t push these things and push lenders to do these, they’re going to end up with a lot of properties they can’t move. You have a lot of lenders that aren’t getting into these loans. I don’t understand it.”
Offering the program also could benefit a lender in the area of community investment, the OCC noted last week, because it would demonstrate its work with moderate-income consumers buying in low- and moderate-income areas.
A 203(k) loan isn’t a quick, or easy, approval process but in the current lending environment, there aren’t many mortgages that are a quick slam-dunk. It’s a viable option for eligible borrowers who’ve got time on their side (they’re willing to wait for their homes to become habitable) and the patience to get through the documentation, said Nancy Hammock of Re/Max Properties in Western Springs.
Contractors in Oak Park are close to finishing the rehab work inside the foreclosed four-square that Megan and Nick Adamski recently bought for themselves and their 1-year-old twins. The couple rent in Oak Park and wanted to stay there and stay within their means. “It allowed us to buy in an area that we otherwise wouldn’t have been able to afford,” said Megan Adamski.
On the Northwest Side, the foreclosed brick two-flat that Parks looked at seemed like a steal for $90,000. That was, until she went inside. “There was nothing in there,” she said. “They destroyed everything, the pipes, the toilets. At first, I was scared. I was like, $90,000, OK, but how are we going to fix everything up?”
After learning about the purchase-rehab program from her real estate agent, Parks closed on her loan in February. She moved in after a contractor worked for three months to put the building back in shape, and she’s already rented the other floor of the two-flat. Parks invested almost $5,000 of her own funds to upgrade some of the lighting and the kitchen cabinets.
Admitting it was a lot of work and the process required a lot of patience, the first-time homeowner advises others who hear about a 203(k) to “go for it.”
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mepodmolik@tribune.com
